Should I consider equity release for my home?
Should I consider equity release for my home?
Equity release allows over 55s to access some of the value tied up in their home, which can then be used to fund retirement, life plans or unexpected expenses. The money can generally be taken either as a lump sum, several payments over time, or a combination of the two.
While equity release is a great option for many people, it isn’t necessarily right for everyone. You need to make sure you have a clear understanding of what is involved and the potential pitfalls, so you can make the right decision for your long-term interests and those of your loved ones.
How does equity release work?
There are two different types of equity release – lifetime mortgages and home reversion – how equity release works for you will therefore depend on which of these options you go for.
Lifetime mortgages – This is a mortgage secured against your home (which must be your main residence). You can either make monthly repayments, as with a standard mortgage, or allow the interest to ‘roll up’ and be paid off when your home is sold (either following your death or if you move into long-term care).
Some key advantages of a lifetime mortgage are that you retain ownership of your home and you can also usually take the lifetime mortgage with you to another property if you move, as long as the new property is acceptable to your lender.
Home reversion – This involves selling a part or the whole of your home to a provider in exchange for a lump sum or regular payments. You will then be able to stay in the property rent-free until you pass away or move into care.
Key advantages of home reversion include the payments you receive usually being tax-free and that you will not be charged interests as this is not a loan.
It is worth noting that with both types of equity release, you can ringfence a percentage of the property’s value, so you can leave an inheritance for your loved ones. You will also benefit from a ‘no negative equity guarantee’ meaning that you can never end up owing your provider more than the total value of your property.
How much equity can I release?
With a lifetime mortgage, you can typically borrow up to 60% of the value of your home based on its current market value (your lender will need to have a valuation carried out). You will generally be able to borrow a larger percentage of your property’s value the older you are.
With home reversion, you will normally get around 20-60% of the market value of whichever portion of your home you choose to sell. The percentage of the market value you receive will usually be higher the older that you are when you enter into a home reversion plan.
How much does equity release cost?
With both forms of equity release, the main cost will come when your home is sold, either after your death or when you move into long-term care. Depending on whether you ringfenced part of the property’s value for your loved ones, the cost may be up to the full value of your home.
With a lifetime mortgage, you must also think about the interest that will accrue on the loan. By law, the interest rate must either be fixed or there must be an upper limit if the interest rate is variable. If you choose to have the interest rolled up and repaid when the whole mortgage is paid off, the final cost of this interest can be very significant.
How long does equity release take?
This will depend on the circumstances, but it commonly takes around 4-6 weeks for funds to be released when taking out a lifetime mortgage and around 6-8 weeks for a home reversion plan.
What are the potential pitfalls of equity release?
With a lifetime mortgage, choosing to have the interest rolled up and repaid when your home is sold can mean your debt adds up quite quickly. It’s therefore important to be clear about what the interest rate is and how this will affect your overall debt.
Many people now choose to make monthly repayments, either covering the interest or the interest and capital on their lifetime mortgage, to avoid this issue.
With a home reversion plan, it’s worth bearing in mind that you will remain liable for maintaining, repairing and insuring the property. It is therefore usually sensible to have an in-depth building survey before taking out a home reversion plan to make sure any potentially expensive issues are identified before it is too late.
With both types of equity release, you also need to think about how this might affect your ability to fund care home fees in future if this ever becomes a necessity. The money you receive can also potentially affect your entitlement to certain means-tested state benefits.
When can you release equity in your house?
You can usually take out a lifetime mortgage once you turn 55, while for a home reversion plan you may need to be 60 or 65 depending on the provider. It’s worth bearing in mind that, the older you are, the better deal you are likely to get.
So, is it worth releasing equity from your home?
The honest answer is that it depends entirely on your circumstances. Your age, your income, how much money you need to release and your plans for the future will all affect whether a lifetime mortgage or home reversion plan could be a good choice. You also need to think carefully about your general health and whether you are likely to need equity from your home to fund the cost of future care.
Before entering an equity release deal, it is vital to make sure you are very clear about the terms and conditions you are agreeing to, so you are not hit with any unexpected surprises later on. You need to remember at all times that any equity release deal you sign up to matches your long-term interests and not just your short-term plans.
Get expert legal support for equity release
When thinking about equity release for your home, it is always a good idea to seek specialist legal advice and make sure you have a trusted firm of solicitors to handle the transaction for you. This helps to ensure you can release equity from your home smoothly and safely, while making sure the terms match your long-term interest and those of your loved ones.